Lies and layoffs. Asymmetric information and unemployment equilibrium

Abstract

Implicit contracts were initially seen as a form of insurance. Workers bought a less variable wage at the expense of a slightly lower average wage. But as long as this idea of implicit contracts persisted, they could do little to explain unemployment. A risk-averse worker is unlikely to buy a steadier wage if it is at the increased risk of losing his job. He might do so if the disutility of labour or the level of unemployment benefit were high enough, but in such cases we are effectively back with the classical version of unemployment.